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Last Updated: Tuesday, 14 December, 2004, 22:00 GMT
US raises interest rates to 2.25%
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The US Federal Reserve has raised rates by a quarter percentage point to 2.25% - its fifth increase since June.

Encouraged by the country's economic performance, the Fed's policy-makers voted unanimously for the move.

Announcing the decision, the Fed added that future increases would remain "at a pace that is likely to be measured".

The current round of rate increases began in June, when the central bank ordered its first rise in four years, with rates at historic lows of 1%.

Road to recovery

Extra-low rates had been used as a means to help kick-start the economy after the 2001 recession.

We doubt the Fed will even consider deviating from its current 25 base points-per-meeting pace at least until Fed funds reach 3.0%
Chris Low, FTN Financial
Furthermore, US industrial output figures released just before the Fed's latest meeting showed US output is continuing to improve.

Analysts say the latest rates increase comes as a recovery in the US economy, the world's biggest, shows signs of robustness and sustainability.

Between July and September the economy grew at an annual rate of 3.7%, recent retail sales figures showed a surprise upsurge and employment continues to recover with 112,000 jobs added to the market in November.

In a statement, the Fed added the economy "appears to be growing at a moderate pace, despite the earlier rise in energy prices, and labour market conditions continue to improve gradually".

Rises ahead?

Many pundits remain undecided about where the Fed will go at its next rate-setting meeting in February, with some claiming the use of the phrase "measured pace" signals more hikes ahead.

"I think the Fed believes the economy is on cruise control right now, boosted by accommodative monetary policy, and that it still sees the need to move interest rates closer to neutral levels," said BMO Financial Group senior economist Sal Guatieri.

However, inflation risks - such as rising consumer prices and wage costs - could force the central bank into an increase sooner rather than later.

But the Fed shrugged off any inflation worries saying inflation and longer-term inflation expectations remained "well contained".

Since it began its cycle of tightening, the Fed has raised rates by quarter point increments at each time.

Most experts now expect US borrowing costs to hit between 3.5% and 5% next year.

Muted reaction

"We doubt the Fed will even consider deviating from its current 25 base points-per-meeting pace at least until Fed funds reach 3.0%," said Chris Low, chief economist at FTN Financial.

Despite an initial rise in US stocks after the decision, the market settled back to earlier levels as the Fed's decision had been widely anticipated.

However, in the last hour of trade stocks surged to close 38 points ahead at 10,676, with investors positive about the outlook for the economy in the wake of the Fed's decision.

Elsewhere, the dollar inched up against the euro.

Higher or rapidly rising interest rates tend to give the dollar support as they boost yields for some US-based assets such as short-term debts, making them more attractive to investors.

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